09/19/2012

After 40,000 years of civilization, we very clever creatures still cannot predict the weather with any reliable degree of detailed accuracy more than about a week out. (But some of us still pray for rain.) Scientists who have spent their lifetimes working on extraordinarily specialized problems routinely are baffled by new and unexpected developments. (But some of us still believe the universe is turtles all the way down.) Our highest-paid stock-pickers routinely are outperformed by darts thrown at a board, by kindergartners, and by monkeys. (But some of us still believe in the sure thing.) On and on it goes: Executives reliably make disastrously bad decisions about their own businesses, and most entrepreneurs fail.

In spite of the massive piles of evidence surrounding them, politicians routinely tell us that if we will merely give them the power to do X, then Y surely will follow. The Obama administration predicted that if the stimulus and other policies were enacted, then unemployment would decline to 5.2 percent. (It isn’t 5.2 percent.) Mitt Romney says that if we enact his agenda, the result will be 4 percent growth. Personally, I think that politicians should be goosed with a Taser every time they use the word “percent” in a future-tense sentence. But to be more charitable, let’s instead conclude that such projections should be viewed skeptically.

Unhappily, many economists desire to play kingmaker and therefore lend the prestige of their discipline to the wishful thinking of politics, where arguments are oversimplified to a point that is indistinguishable from dishonesty. They are aided in this by journalists who provide a bridge from the rigorous world of academic research to the standards-free world of political discourse. The result is something like a fairy tale or just-so story. That voters choose to accept such fanciful promises is another piece of evidence that our politics is not rational but ritual.

Closely related to this is Friedrich Hayek's now famous quote from The Fatal Conceit: "The curious task of economics is to demonstrate to men how little they really know about what they can imagine they can design." Also related is Hayek's banquet speech after recieving the Nobel Memorial Prize:

(T)he Nobel Prize confers on an individual an authority which in economics no man ought to possess.

This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence.

But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.

There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society - as the press tends to treat him till in the end he may himself be persuaded to believe.

One is even made to feel it a public duty to pronounce on problems to which one may not have devoted special attention.

I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past.

I am therefore almost inclined to suggest that you require from your laureates an oath of humility, a sort of hippocratic oath, never to exceed in public pronouncements the limits of their competence.

Economics is not a discipline dealing with exact predictions about future events. Even the idea that we can know how the economy will function in the coming years can pretty much be falsified in one image:

The most humbling image for modern economics.

Blaming the failure of that prediction on merely the partisan desires of the Council of Economic Advisers is missing the point. There were good economists that sat on the council and Christina Romer, certainly a successful economist by any objective criteria, chaired it. However, the economics profession as a whole has been infected by the idea that the type of precision found in the physical sciences can and ought to be striven for in economics.

Robert Lucas advocates this type of approach in his article, "Methods and Problems in Business Cycle Theory", when he writes:

One of the funcations of theoretical economics is to provide fully articulated, artificial economic systems that can serve as laboratories in which policies that would be prohibitively expensive to experiment with in actual economies can be tested out at much lower cost. To serve this function well, it is essential that the articial "model" economy be distinguisged as sharply as possible in discussion from actual economies.

and

On this general view of the nature of economic theory then, a "theory" is not a collection of assertions about the behavior of the actual economy but an explicit set of instructions for builing a parallel or analogue system - a mechanical, imitation economy. A "good" model, from this point of view, will not be exactly more "real" than a poor one, but will provide better imitations. Of course, what one means by a "better imitation" will depend on the particular questions to which one wishes answers.

This is pseudo-scientific nonsense. The economy is simply too complex for a single model to be able to imitate and by focusing on testing singular propositions with these models, Lucas looses focus on what economics can do.

Economics can never say whether or not GDP will increase by a given percent each year. It can never provide us with a reliable prediction of the course of unemployment in the course of even a couple of years. What economics can do, though, is provide pattern predictions about the general pattern of the economy at the margins.

It can tell us that instituting rent-control will lead to a shortage of low-income housing at the margin and it can inform us that at the margin landlords will seek other means, like a key charge, for charging for rent. It can tell us that expanding the money supply beyond the demand for it will lead to inflation. It can tell us that socialism will anywhere and everywhere fail. Those are powerful predictions, but they do not try and overstep the bounds of economic reasoning by making predictions about the exact quantities that will change or the exact times those changes will happen.